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UNITED STATES A win-one/lose-one forecast on the China steel threat

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Once again, Chinese steel imports were the most hotly debated issue at AMM's third annual China Summit. For some, the debate felt like déjà vu.

Some attendees complained that the arguments thrown back and forth between those in favor of "free" trade vs. those in favor of "fair" trade were getting a little tired. China's alleged pegged currency and its value-added tax rebate were just a couple of the well-worn issues that were discussed, and there proved to be little new information. Indeed, a number of panelists said outright that much of their presentations contained information they had given in the past. That doesn't really get the pulse pounding.

To be sure, the conference provided some memorable moments—a fired-up Rep. Peter J. Visclosky (D., Ind.), for example, saying that the Chinese didn't care about the safety of their mineworkers, which prompted one Chinese official to invite Visclosky and the House Steel Caucus to visit China. And many delegates were surprised by the uncharacteristically mellow speech by the usually combative Daniel R. DiMicco, chairman, president and chief executive officer of Nucor Corp., Charlotte, N.C., in which he emphasized cooperation with the Chinese.

Most notable, however, was an analyst's suggestions that, for a variety of reasons, China's steel exports were approaching their peak and China could become a net importer of steel again—perhaps within this decade.

Sal Tharani, associate global investment research analyst at New York-based Goldman Sachs & Co., said China's potential for oversupply remains the biggest risk to the global steel industry, although "slowing production growth data out of China is encouraging."

Recent data supports that assertion. U.S. imports of steel products totaled 2.3 million tonnes in August, down 22.2 percent from the previous month, according to preliminary figures from the U.S. Census Bureau (AMM, Sept. 26). Imports from China fell 26 percent to 326,586 tonnes in the same comparison.

Could this mark the beginning of the end for the flood of Chinese steel imports? "Don't base your sex life on one night," one domestic steel industry source said. "One month does not make a trend."

Fair enough. It's a safe bet that U.S. steel imports from China will reach a record high this year—thus far, imports from China are outpacing 2006 levels by nearly 8 percent, although imports from the rest of the world are lagging behind the year-earlier total by nearly 24 percent.

But 2007 will mark the peak for U.S. imports from China because the Asian nation isn't a cheap place to produce steel, Tharani said, noting that it is forced to import much of its raw materials. Iron ore prices, for example, will rise by 30 percent next year, he said.

Coupled with rising freight rates, the increased cost of making steel will force the closure of small, inefficient steel plants in China if the country's government doesn't do so first, Tharani said. The Chinese government has in the past made promises to shutter old, polluting capacity, but so far the U.S. industry has been unimpressed with its efforts.

Also, China's investment in its steel sector has shrunk while Bejing has implemented measures to restrict exports and consolidate the industry, Tharani said.

Perhaps most importantly, however, is the fact that neither the Chinese nor the United States wants China to be the world's leading steel supplier. Indeed, most agree that China would prefer to take better advantage of its cheap work force by exporting downstream products like washing machines and cars. If successful on that front, the risk shifts to steel consumers—already battling, and in some cases losing out to, products manufactured in China.

"We're fearful of a loss of our customer base," one steel industry source said. The virtual end of the U.S. coat hanger industry is just one example of how the downstream market is losing to its Chinese counterparts.

In the meantime, the domestic steel industry isn't sitting on its hands watching the calendar. The major associations say action is needed to stem the tide of Chinese steel imports. But that's another familiar story—the legislation the industry so desperately wants on trade and currency has stalled in Congress, and steel industry lobbyists say they don't know whether it will get a hearing before Congress adjourns in December.

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